The problem with passive investing, I promise, is worse than you think.

There has been plenty of anxiety on Wall Street about the rise of indexing and ETFs, known collectively as passive investing, with the number of indexes exceeding the number of stocks. Academics and financial pundits have posited that index investing may be pushing up consumer prices, though there are also critics who are skeptical that it kills competition. But if your concern about index investing starts and ends with the notion that some fund managers will lose their jobs, that you might have to pay slightly more for an airline seat, and that it’s a small price to pay for lower fees in your 401(k), your conclusion might be incredibly wrong.

The rising stock market, and the fact that index funds have beaten every variety of their active rivals, could be blinding investors to increasing damage that indexing is already doing, and could still do, to the market and the economy. The real concern is not just that actively managed funds could disappear but that the entire market could be left for dead.

Earlier this summer, another media outlet published a popular and debated article on the complete calamity that could happen if climate change continues on its current path. So, given that these are the dog days of summer and that even a CEO-led revolt against President Donald Trump can’t shake the market, we decided to give passive investing the worst-case scenario treatment.

Like climate change, the forces driving investors to passive investing may be too far along to turn back. The velocity toward index-driven dystopia appears to be increasing.

Indexing has, of course, been around awhile. Nonetheless, earlier this summer, this statistic from a Bank of America report seemed to catch many by surprise: Funds run by Vanguard, the giant index fund company, now own at least 5 per cent of 490 of the S&P 500 companies, up from just 115 seven years ago.

The same report said that passively managed assets as a percentage of all managed assets had risen to 37 per cent. Soon afterward, a report from Deutsche Bank predicted that half of all assets would be passively managed by 2021. While the reports inflated the figures by looking at mutual fund assets instead of all assets invested in the U.S. market, what is striking is that at 19 per cent — the total amount of the U.S. stock market owned in index funds or ETFs at the end of July, according to data from Morningstar and Gadfly calculations — the effects of passively managed funds are already being felt. Imagine when it actually gets to 37 per cent, or 50 per cent.

The Stock Market Could Get a Lot RiskierPassive investing, which was supposed to make it easier for the set-it-and-forget-it set, could make the market intolerable, especially for individuals. The idea of investing in a diversified portfolio is that you get a basket of stocks. When some are expensive, others are cheap, and that can offer protection when the stock market drops. Index funds, though, are pushing up the value of all stocks, leaving few safe havens.

At the height of the dot-com bubble, for instance, when the most expensive stocks in the market, mostly tech shares, were trading at 50 times earnings, the cheapest stocks by quintile were trading at less than 8 times earnings. The market’s cheapest 20 per cent of stocks are now trading at nearly 11 times earnings and becoming more expensive.

But the real problem will be volatility. A few years ago, some investors used to joke that if the market was totally passive, not only would there be no volatility, there would be no stock movement, at least not for individual stocks. The market would move in lockstep when people bought or sold an index fund.

But that’s not how it’s playing out, or likely will. The Bank of America report on indexing last month pointed out that while the market overall seems smooth at the moment, there has been a recent spike in the volatility of stocks that are owned largely by ETFs and index funds, probably because of liquidity.

Even small trades could cause bigger price swings

With fewer shares to trade, once more are locked up in ETFs and index funds, even small trades could cause bigger price swings. In the six months ending in May, Bank of America found that the average volatility of the 100 most passively owned stocks tripled to 45 per cent above the rest of the market.

The CBOE Volatility Index has averaged 20.5 over the past decade. If it were 45 per cent higher, that would bring it to nearly 30, or 20 per cent higher than where it was at the peak of last year’s high-yield debt concerns and not much lower than where it was during much of the worries about European debt in 2012. And that would be the average level of volatility based on a market where just 20 per cent of all equity is indexed. The VIX traded as high as 80 during the financial crisis, which means already at times of stress the VIX, which is called the market’s fear gauge, could get up to 120, or about 10 times where it is now.

Income Equality Income inequality is already a problem in America. Index funds are making it worse. A study published last year by the European Corporate Governance Institute examined the compensation of the top five highest paid executives for each company in the S&P 1,500 plus 500 other public companies. It found that executives at companies in industries with high common ownership were paid 25 per cent more than executives in industries with lower levels. What’s more, CEOs received most of the excess pay gains. After controlling for other factors, the study found that CEO pay tends to jump 10 times as much as the pay of the other top executives after a rise in passive ownership.

The compensation study also found that as index fund ownership of a company rose, the pay of top executives was more closely tied to the performance of the industry than that of their own company. The higher the level of passive ownership, the study found, the more a sort of reverse competition started to dominate an industry. The fallout: If the market were mostly index-owned, executives might actively work to help their rivals, at least if they wanted to see their paychecks grow.

According to the Economic Policy Institute, the current ratio of CEO pay to average worker pay is 271 to 1. If index funds come to dominate the market, CEOs could soon make $338,000 for every $1,000 paid to the average employee.

Innovation Competition is what academics worry about when they worry about passive investing. Traditionally, preserving competition was mostly about maintaining a certain number of companies in every industry. Federal antitrust laws block monopolies. But academic studies have shown recently that index funds or horizontal ownership, where the same investors own a good percentage of the shares in rival companies, can also stifle competition.

Horizontal ownership has risen sharply in the past decade and a half. For a large company, the chance that at least one of its large shareholders owns shares in a rival has risen to 90 per cent, up from just 16 per cent in 2000. And the more horizontal ownership there is, it appears, the less competitive a company, and an industry, becomes. In 2014, two economic consultants, Jose Azar and Isabel Tacu, and a Michigan economics professor, Martin Schmaltz, found that in the airline industry, where common ownership had risen to 70 per cent, prices were as much as 12 per cent higher because of common shareholders.

But the bigger problem is not prices but innovation. If CEOs have an incentive not to compete, then they might not try all that hard to innovate, spending less on research and development. Indeed, R&D spending has slumped since the 2008 financial crisis. Late last year, a study by a New York University professor, Thomas Philippon, and a graduate student, German Gutierrez, examined the reasons R&D spending has been weaker than expected since at least 2002 but plunged after the Great Recession.They found only three factors that at least mathematically appeared to correlate with the drop in R&D. One was an increase in index investors.

The effect on investing, and the economy in general, is immense. At roughly 20 per cent of the market, passive investing, by Philippon and Gutierrez’s calculations, at least in part, could be holding down corporate investment by $125 billion a year. If passive investing were to reach 50 per cent, the amount could drop by $328 billion a year, which is equal to about 2 per cent of U.S. GDP. Remember when the economy used to grow by 4 per cent? Indexing could be a big part of the reason it no longer is. A Disappearing Market Initial public offerings have long been a cornerstone of what drives American capitalism, allowing companies to become bigger. But bankers at some of the top underwriters have expressed concerns that if the passive trend continues, IPOs could become a thing of the past. That opinion could be in part be perspective: Investment bankers who sell IPOs rarely come in contact with index fund managers. Without active fund managers, IPO bankers would have no investors to market to or figure out how to price an offering.

But you can imagine an IPO market that is dominated by IPO index funds. Bankers might like that — no need to market deals because the IPO funds have to buy no matter what. Pricing, however, would most likely become a function of the amount of money in IPO index funds and their rules, and without any mechanism for rewarding the individual value of a business, there might not be many who want to do an offering.

There are no US$17 trillion economies, or even close to it, that exist without a public market

That might already be starting. The number of IPOs has plunged recently, which is odd given that the stock market in general, and tech stocks in particular, have been hitting new highs. Usually that would result in a good IPO market. The fact that 20 per cent of the market is now owned by indexes, perhaps drawing money away from mutual funds and other institutional investors that would put money in IPOs, could be playing a role.

IPOs And it’s not just the IPO market that is being deserted. The number of public companies has been falling, too. And the general worry is about the stocks left behind. Demand is shrinking for companies that are not in an index. And as the shares of those companies stop reflecting what executives think is the value of their companies, the executives may abandon the public market, choosing to go private or get bought.

But it’s not just the left-behind stocks. Even companies in index funds may soon start to believe their stock prices no longer reflect their value despite good earnings or a new product. Those companies might abandon the public market as well. Eventually, as the index doomsayers suggest, there could be either very few, or no, public companies.

And then you have to worry about the U.S. economy in general. There are no US$17 trillion economies, or even close to it, that exist without a public market. Perhaps indexing, and the growth of the private market, and private equity funds, and the still very liquid bond market, will morph the U.S. finance market into something that can support the world’s largest economy without a public stock market that is neither well used or loved. But at the very least, if indexing continues the way it has, we are likely to see a much different financial landscape then we do now, and fast.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.